State Farm's policy language violates state law, is voided by Court of Appeals

Geraldine Smitham and John Yun sued State Farm, Smitham's insurer, seeking compensation for property lost in an apartment robbery (Yun was appointed limited Guardian for Smitham's financial affairs).  State Farm initially denied the claim entirely, arguing that it was waived by Smitham because she did not timely file a Sworn Statement Proof of Loss on State Farm's form.  Later in the year, State Farm backed off this denial and paid just over $4,000.00 on a claim that Plaintiffs valued between $90,000.00 and $150,000.00.

Michigan law establishes certain statutory duties of insureds and insurers when purchasing or selling fire and casualty insurance.  Among those rules is a statute allowing one year from the date of formal denial in which an insured may file a legal action. State Farm argued that its policy language, which allowed the one year limitation to be "tolled" or extended, only applied where there was a "formal denial" by the insurer.  Therefore, the insurer claimed, the claim period in this case was not extended because no denial occurred and no tolling. 

The Court of Appeals cited a prior decision against Allstate Insurance Company (which had taken a position similar to State Farm's current argument), and voided the operative term of the State Farm policy.  The Courts in both cases noted that attempting to condition the statutory tolling period on a "formal denial" was simply inconsistent with the governing statutory language.

This Court--like the previous court--rejected the insurer's argument that interpreting the plain language of the statute to allow tolling absent a formal denial, or in the event of underpayment --could result in an indefinite tolling period.  It noted that an insurer can end the tolling period at any time, simply by sending a "Formal Denial."  The Court pointed out that this interpretation of the statutory language reinforces the intent of the statute:  it is designed to provide insureds with formal notice of their need to take legal action in the event of a formal denial, when the one year statute of limitations will begin to run.